The Homer City Council on Monday dropped the city’s 2007 property tax rate for full-time residents months before it begins work on the 2007 budget.

The rate will be reduced from 4.5 to 4 mills for property owners in the city who can show that their use of that property as a primary residence makes them eligible for the Alaska Permanent Fund Dividend.

Under the new rate, the tax bill for a qualifying resident living on property valued at $250,000 would be reduced by $125.

The tax rate change came after council member Mike Heimbuch proposed an amendment to a resolution that would reduce all city property taxes regardless of residency.

According to the city’s finance department, that original reduction would have cost the city $261,402 in tax revenue.

As amended, the city will likely lose less money under the rate change because some properties are owned by people who do not qualify for dividends.

Council members who supported the change said recent higher borough assessments provided a surplus of property tax revenue to the city and they wanted to give some of that money back.

“We failed on a vote of 4-3 in May of this year to lower the property tax rate even though, based on an average 22 percent increase (in assessments) we would make more money than was budgeted,” council member Doug Stark said. “I think it’s time to go ahead and do this since we are ahead of the game with property tax anyway.”

But some troubling news on sales tax receipts and increased employee retirement expenses gave council member Beth Wythe pause.

“Every other expense of the city has been on an increasing spiral. And I just feel like it’s imprudent for us to come at this moment before we start a new budget cycle when we are recognizing a reduction in revenues and increases in expenses beyond what we projected for,” she said.

According to the city manager’s report Monday, the city has collected approximately $150,000 less in sales tax this year than last year at the same time.

The report also indicated that the city’s PERS bill may be increased by 10 percent in 2007 which could mean an additional $100,000 expense.

According to the report, if the city does not have a good second half of sales tax receipts this year it will likely end up spending more than it received, which would reduce the city’s rainy day account called the fund balance.

Council member Mike Heimbuch said he agreed with everything Wythe said, but she wasn’t telling the whole story.

“We get lots of money from summertime traffic, but we need to do something about the winter,” he said.

There needs to be a discussion of the legality of the city’s action. The public and the city lawyer need to weigh in on the tax reduction for residents, but it follows what the Kenai Peninsula Borough did last week with the senior exemption, he said. The assembly last week approved a measure that calls for senior citizens to be eligible for a dividend and not be absent from the peninsula for more than 120 days a year to receive the borough’s unlimited property tax exemption in the future.

“There are moves afoot around our state in our coastal communities to try to do something that helps the year-round residents and I’d like to see us pass this,” Heimbuch said.

The resolution passed 5-1 with Wythe voting against it.

It was then brought up for immediate reconsideration by Stark, over the protest of Heimbuch, who said it should wait in case the city lawyer deems it unlawful, and Wythe who said now was not the time to lower property taxes.

“Are you going to also be sitting here and turn around and increase this mill rate again when we lowered it when we did not have the finances to lower (it)?” Wythe said.

Despite these objections, it was approved again, this time 4-2, with Wythe and Novak voting against it. The move to immediately reconsider the resolution on Monday means the council cannot reconsider it at the next meeting. If the city attorney or borough finds fault with the resolution, the council would have to rescind it and replace it with something else, said City Manager Walt Wrede.

In other news, the council:

n Postponed action on an ordinance that would allow hunting with air-powered pellet guns and bows and arrows within the city limits.

n Passed a resolution in support of keeping the USCGC Hickory and USCGC Roanoke Island based in Homer.

n Passed a resolution recognizing the intrinsic value of a viewscape on private property in relationship to the installation of utilities. While carrying no ordinance authority, this resolution states the city recognizes viewscape as a factor worth considering when developing utilities.

n Rescheduled the steep slope development ordinance as a top priority for the advisory planning commission.

n Accepted three Department of Commerce, Community and Economic Development grants which include: $28,000 for rescue systems upgrades, $2 million for Homer City Hall and $10,000 for smolt stocking in the Nick Dudiak Fishing Lagoon.

n Postponed awarding the contract for the Kachemak Drive Phase One Water and Sewer Project and opened it up again for bids.